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Cliff's Natural Resources Opens Friday's Session with Some Wind In its Sails

With a market-share of $3.35 billion, US mining firm Cliff’s Natural Resources (CLF) counts only the nation’s largest industrial metals and minerals companies as its peers.

But while stocks were generally on a tear throughout most of 2013, the mining titan’s losses on the year, about 30 percent, were the inverse of the gains for the benchmark Standard & Poor’s 500 index for the same period.

Coal Industry Blues

The coal industry has been on an increasingly defensive footing in recent times. The April 2012 catastrophe at Massey Energy’s Upper Big Branch mine in West Virginia that resulted in the deaths of some 29 workers was attributed to an extremely lax, if not somnolent, regulatory environment, and it cast aspersions across an industry that had already been fighting charges of rampant carbon emissions. By that point, coal producers had already begun giving up on singing the praises of alleged carbon capture and storage technology that would one day make the industry’s product a “clean” one.

By that time, however, the shale boom had already begun to radically alter the way in which America’s future energy needs were conceptualized. Natural gas, with its much greener vocabulary and public image, not to mention the exponential returns shale stocks were and are still generating, seemed to be the nail in the coffin for coal producers, as the US moves into the position of the world’s largest producer and exporter of both crude oil and natural gas.

The larger trends have been weighing on coal producers for some time now. But Cliff’s presents a special case, as the context in which the company released its fourth-quarter earnings report following closing bell on Thursday evening was determined not only by the industry’s ailments, nor even the dismal performance of its shares last year.

Activist Shareholder Makes Its Move

Indeed, the company has recently been rattled by moves from shareholder Casablanca Capital, who is pushing for Cliff’s to gather up its US and Eastern Canadian operations to be spun off into a Master Limited Partnership (MLP). The basic argument in favor of the move on the part of the activist fund is a more or less parochial one- to increase shareholder value.

So the pressure was on for Cliff’s with the earnings statement for their recently-ended Q4, and the company definitely delivered. Earnings for the period were $218 million, or $1.22 per share on revenue of $1.52 billion, compared to the prior-year’s quarter, during which the company earned $89 million, or $0.63 per share on revenue of $1.54 billion. Analysts had expected much lower earnings of $0.77 per share, and on slightly lower revenue of $1.45 billion.

Saying "No" With The Upper Hand

No surprise then that the company’s board issued a resounding “no” to Casablanca’s spin-off plan, and countered with a scheme of their own that would cut costs by closing down their more costly operations in Newfoundland and Labrador by the end of Q1 2014, as well as slash capital expenditures in half to as low as $375 million.

From the company’s perspective, a spin-off would be somewhat irrelevant, as all of the company’s segments are more or less tied to the Chinese economy (one of Equities.com’s newest contributors, Benjamin Cox, argued against the breaking up of the company on essentially the same grounds on this site almost two weeks ago). In any event, while Cliff’s is thought of as a coal producer, nowadays the company derives only about 13 percent of its revenue from coal, and 81 percent of revenue comes from iron ore. Both of those resources are still sought after by a Chinese economy that may be cooling off, but is by no means slowing to a standstill any time soon.

Judging by Thursday’s late-trading at least, investors appeared to be coming down on the side of the company, with shares taking an 8 percent leap to $23.65 a piece.

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